In the Eye of the Storm

As we enter the height of the hurricane season, it may be worthwhile to recall,
when considering the economy at large, the particular deception that lurks
in the "eye" of the storm. After a raging tempest, the sudden appearance of
the calm 'eye' can all too easily encourage people to leave their shelter in
order to assess and even repair damage, exposing themselves to the often more
devastating second leg of the hurricane.

We have long warned our readers of a coming real estate crash which would
then lead to a credit crunch, and eventually a major round of bank failures.
We have argued that these developments would be the precursors to a major recession,
and perhaps a depression.

As predicted, the collapsing values of bonds backed by subprime mortgages
did indeed lead to a collapse of the entire mortgage market, a bank liquidity
crisis, a credit crunch and a steep fall in consumer confidence. This was the
first leg of the storm, but the full blown banking collapse and the deep recession
are not yet manifest. The conventional wisdom holds that the bullet has been
dodged.

The markets are buying this hypothesis. Tempted by the latest crop of economic
data that seems to show expansion, U.S. stocks have moved sideways, and even
climbed slowly. The U.S. dollar has risen from its lows, and the rate of bank
failures appears to be under control. In short, with gold off almost twenty
percent from its highs, it looks as if many investors have concluded that the
worst of the storm has past, and have decided look for good deals amid the
stock market wreckage. Proceed with caution.

At its core, our economy is simply showing the effects of a national depletion
of wealth caused by decades of consuming more than we produce and spending
more than we earn. The natural corrective mechanism to such a condition is
a recession. But recession is very bad for politics, especially in an election
year. So, the potential corrective recession has been postponed by a massive
injection of billions of dollars into the economy. At a time when we needed
serious physical therapy, the government instead offered four massive pain
killers:

-First, the debased U.S. dollar has boosted exports and helped the GDP to
remain positive.

-Second, by setting interest rates below the rate of inflation the Federal
Reserve discouraged savings and encouraged borrowing and spending.

-Third, massive government lending kept the financial service industry solvent
and the mortgage lenders operating.

-Fourth, stimulus checks have kept American's spending money that they have
not earned.

Although these government palliatives have succeeded in calming the immediate
crisis (by saddling American taxpayers with massive liabilities), they have
not cured the disease. If anything the huge doses indicate that the patient
is getting far worse, even if in silence!

Last week, the FDIC announced that bank losses have tripled to $26.4 billion,
leading to a fall of 86.5 percent in bank earnings. The Case- Shiller home
price index shows American housing to have fallen in value by some 20 percent
and still sliding. These massive movements have yet to be felt along the entire
economic spectrum...but it is inevitable that they will be.

Don't be lulled into a false sense of security and start buying U.S. equities
at seemingly knockdown prices. We are in the eye of the hurricane. Beware of
the second leg!

For a more in depth analysis of our financial problems and the inherent dangers
they pose for the U.S. economy and U.S. dollar denominated investments, read
Peter Schiff's book "Crash Proof: How to Profit from the Coming Economic
Collapse." Click here to
order a copy today.

John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.